Symantec's Trojan Buyback

A couple of weeks back, information security company Symantec (Nasdaq: SYMC) reported its fourth-quarter and fiscal 2004 earnings. Something has been nagging me about the company for awhile now, and it just clicked. What that "something" is, I'll get to in a minute.

But first, the numbers: Symantec continues to benefit from the rash of computer viruses infesting the Internet, and business is not only booming, it is accelerating. For fiscal 2004, revenues increased 33% to nearly $1.9 billion. But in the last quarter, the rate of increase accelerated, up 43% over the fourth quarter of 2003.

Likewise with profits. For the year, the company increased its per-share diluted profits by an impressive 39% to $1.07. As with revenue, the quarter's profits increased faster than did the year's, rising 57% to $0.33 per diluted share.

Basically, the company seems to be doing everything right from a business standpoint. As high as its gross margins were last year (82.2%), it managed to nudge them a bit higher (to 82.4%). It's the same story with operating margins: Last year's 24.3% became this year's 27.5%. And Symantec promises more of the same for next year, predicting gross margins will rise to a full 83% and operating margins to about 31% for its fiscal year 2005.

Consequently, Symantec raised its revenue and earnings guidance for next year. Revenues are now projected to run about $2.3 billion, and earnings should be in the neighborhood of $1.37 per diluted share, for 28% year-on-year growth.

But here's the catch. Symantec says it will hold stock dilution to only 3% this year, just over half last year's rate. "Wonderful news" is what I thought when I first read that. No more imitating antivirus rival Network Associates (NYSE: NET) and its obscene 12% annual dilution.

And then I remembered what I wrote back in January.

If you recall, last quarter, Symantec authorized a massive, billion-dollar buyback of its shares. Assuming it buys them at the recent $47-a-share price, that will account for about 20 million shares, or 6.3% of its shares currently outstanding. Thus, share dilution before the buyback could actually increase to 9.3%, and Symantec could still keep its promise of "3% dilution." To this Fool's mind, there is simply no excuse for a $15 billion company diluting its shareholders by 9%, then spending the company's (i.e., the shareholders') money to mask the dilution.

That's a massive redistribution of shareholder wealth to company insiders. And painting it all as a reduction of dilution is, frankly, insulting our intelligence.

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Fool contributor Rich Smith does not own shares of any of the companies mentioned in this article, Symantec in particular. Perhaps that is why the SoBig virus bit him last year.